Education Does Not Explain Growth in Inequality

On 60 Minutes Sunday, Federal Reserve chairman Ben Bernanke was asked about rising income inequality in the United States. Curiously, The New York Times thought his response would appeal to liberals. From the Times:

When asked about rising inequality in the United States, Mr. Bernanke offered a response that was likely to be embraced by liberals.

“It’s a very bad development,” he said. “It’s creating two societies. And it’s based very much, I think, on educational differences. The unemployment rate we’ve been talking about. If you’re a college graduate, unemployment is 5 percent. If you’re a high school graduate, it’s 10 percent or more. It’s a very big difference.”

Is this true? Of course liberals would be pleased that Bernanke acknowledges that inequality is a moral and economic problem. But would they agree with his diagnosis of the cause? Partially—certainly education affects one's earning potential enormously in a service economy—but there are many other important phenomena at play.

"It doesn’t explain why all the money went to the very top, why college graduates haven’t seen a wage increase in 10 years, or why most of the growth of inequality is among people with the same education," says Lawrence Mishel, president of the Economic Policy Institute. Mishel points to a 2007 speech by Bernanke himself that lays out a fuller exploration of the inequality situation.

Unequal education explains about 60 to 70 percent of widening inequality, estimates Robert Reich, the former secretary of labor and author of the new book Aftershock, which focuses heavily on inequality. The rest can be chalked up to a variety of factors. Wall Street bankers and traders have seen an explosive growth in income by tying their compensation to performance rather than the fee-for-service program that used to dominate as it does in other industries. Now, when the market goes up, Wall Street takes a healthy chunk from their investors, but when it goes down, the only people who lose are the investors. (This also creates an incentive for Wall Street to push markets to become overheated, as John Cassidy explains in a recent New Yorker article. Another New Yorker article, by Malcolm Gladwell, also explains why compensation has risen so disproportionately at the top of the economy.)

Another factor that Reich cites is the decline of labor unions. Unions represent an ever-shrinking proportion of private-sector workers, and unionized workers earn more than their nonunion counterparts. The minimum wage has also declined, adjusted for inflation.

The real elephant in the room, though, is health care. The cost of employer-based health-insurance plans varies less than the difference in wages, and everyone's health insurance is getting more expensive. So much of the wage growth that should have gone into workers' paychecks has gone to just keeping their health benefits the same. (See Ezra Klein for the comprehensive explanation of this phenomenon, with charts.) Our unusual system of tying health insurance to employment rather than, say, legal residency, as in most advanced democracies, is a historical accident. Undoing it and replacing it with a system such as universal single-payer health care is the single biggest thing we could do to address stagnant wage growth. There are plenty of reasons not to support such a shift, but the average worker, who doesn't see the increasing premiums that his employer pays for his insurance, should at least realize that is the tradeoff he is making by sticking with the current system.